Willits' exotic' school bonds: More questions than answers

WILLITS - How could the Willits school board have authorized the borrowing of $3.787 million?in "exotic" capital appreciation bonds that will cost approximately $40.5 million to pay back, and that can not be refinanced or paid back early to reduce costs? Those are questions being asked by many local taxpayers right now, in addition to the question of how a nearly $5 million payment due in July 2014 could possibly have "just come to light."

The Willits News took a non-expert's look through the documents provided to the school board from then-financial advisors Caldwell Flores Winters, at the June and July 2010 meetings at which the bond sales were approved.

Nowhere in those documents was the cost of borrowing funds through expensive capital appreciation bonds spelled out. A look at the minutes (and TWN stories) for both meetings shows no discussion about the cost of borrowing the CABs.

No school board member has come forward? to say they asked about the costs. Former Superintendent Debra Kubin (now Superintendent of Schools in Ukiah) said CFW "continually discussed their conservative approach, especially with small school districts."

On July 6, 2010 the school board approved a "Preliminary Official Statement" to be used for marketing the 2010 bond issuances. The final "Official Statement" document, available to potential bond investors, does have specific figures on pages like "Maturity Schedules" and "Debt Service Schedules." But on the preliminary document presented for the board's approval, those pages are just boilerplate, with no figures actually filled in. Since the exact costs couldn't be provided before the bonds were sold, that's not a surprise.

A document provided by CFW about the bond process for the July 6, 2010, meeting has very limited information and never mentions the term "capital appreciation bonds." It does say that using future taxing capacity (years 2029 through 2044) "nearly doubles the amount of capital funding available this year," from $10.8 million to approximately $18.6 million, "which will allow the district to complete more projects now, reduce the risk of inflation, and make a greater impact on the campuses."

The resolution (Resolution No,. 2009/10-21) passed on June 9, 2010 that authorized the sale of up to $20 million in general obligation bonds includes two different forms, one for the inexpensive current interest bonds and one for the expensive capital appreciation bonds, but the resolution didn't specify how much of either bond would be issued. And again, the forms are boilerplate: with blank lines where figures would eventually be.

The list of definitions in the resolution does identify "capital appreciation bonds" as "bonds the interest component of which is compounded semiannually," and the language in the "Form of Capital Appreciation Bond" document says the amount due at maturity is the original amount "plus interest compounded from the date of issuance." But nowhere is it spelled out that the CABs cannot be paid down or paid off early to reduce costs.

In fact, on page A-9 of the "Form of Capital Appreciation Bond" document, there is a paragraph starting out with: "The Capital Appreciation Bonds are subject to optional redemption prior to maturity as follows:" but then there is a seven-line blank space and no further language regarding "optional redemption." There is no other large blank space like that anywhere else in the documents.

Mendocino County Superintendent of Schools Paul Tichinin told The Willits News he was meeting with interim Willits Superintendent Debbie Pearson this week, but had no additional new information on the bond issues. Tichinin said he was continuing to work with the district and county Auditor Meredith Ford on options to pay back the nearly $5 million bond anticipation note due in July 2014.

"We have a commitment from the board and from the superintendent that they're going to try to make good decisions," Tichinin said, "and not going to work from knee-jerk reactions, and when it comes time that they have to make decisions, they will do it in a straightforward, transparent manner."